CIG Asset Management Review: Market Unknowns
Summary:
* S&P 500 declined for the first month since January 2021
* Increasing economic and geopolitical uncertainty
* Market volatility rising
* Do we know?
Commentary:
The S&P 500 index fell -4.65% in September, its first monthly decline since January 2021 and the worst monthly decline since March 2020.[i] In overseas markets, the MSCI EAFE net index declined -3.19% and the MSCI Emerging markets fell -4.25%.[ii] Chinese stocks, represented by the SSE Composite Index, gained +0.68%[iii] and was one of the very few equity markets with positive performance for the month. Fixed income did not offer much protection against the decline in stocks as the Bloomberg US Agg Bond Index fell -0.87%.[iv]
What changed in the month of September? Economic and geopolitical uncertainty appears to have increased.
On September 3rd, the Federal Reserve Bank of New York issued a suspension notification for Nowcast, its official forecast for growth in the U.S. Gross Domestic Product (the total value of goods produced and services provided during one year) stating the following, “The uncertainty around the pandemic and the consequent volatility in the data have posed a number of challenges to the Nowcast model. Therefore, we have decided to suspend the publication of the Nowcast while we continue to work on methodological improvements to better address these challenges.”[v] Upon hearing this announcement, we were reminded of Yogi Berra, the great baseball player and sometimes philosopher who once said “It’s tough to make predictions, especially about the future.”[vi]
Later in the month, Federal Reserve Chairman Powell held a very unconvincing press conference after the FOMC meeting on September 22. Regarding inflation, Powell said the current inflation is “a very modest overshoot. You’re looking at 2.2[%] and 2.1[%], you know, two years and three years out. These are very, very – I don’t think that households are going to, you know, notice a couple of tenths of an overshoot.”[vii] Did investors notice on September 23 that the National Association of Realtors’ August existing homes sales report showed that the median sales price of existing single-family homes in the U.S. rose +14.9% year over year to $356,700?[viii] Did investors notice that the price of U.S. natural gas hit a 12-year high of 6.325 as of October 5, 2021?[ix]
Chairman Powell also said the current inflation is a “reflection of bottlenecks and shortages that…seem to be going to be with us at least for a few more months and perhaps into next year.” As of September 24, there were 600 large container ships waiting to dock at ports in Asia, Europe, and North America. In June there was an average 14-hour delay of ships arriving to Canadian and U.S. ports. Now the delay is almost 10 days![x] There is not much in the way of historical data regarding the current world-wide supply chain issues. But, as the Drewry World Container Index chart below shows, shipping prices have more than doubled year to date.
Source: Drewry.co.uk
Actionable idea: buy your year-end holiday gifts early and locally.
To make things worse, tensions with China are growing and Taiwan is extremely important to the world economy. Semiconductor companies in Taiwan generated almost 65% of global revenues from outsourced chip manufacturing in the first quarter of 2021. Taiwan Semiconductor (TSMC) alone accounted for 56% of global revenues. Most of the 1.4 billion smartphone processors are made by TSMC.[xi] On Friday, October 1, as China celebrated the National Day of the People’s Republic of China, the People’s Liberation Army (PLA) flew 38 warplanes into Taiwan’s air defense identification zone (ADIZ). October 2 saw 39 planes and on October 3, 16 more planes entered the ADIZ. On October 3 the United States State Department issued a statement urging Beijing to “cease its military, diplomatic, and economic pressure and coercion against Taiwan.” China responded on Monday, October 4, by sending a record 56 Chinese warplanes into the ADIZ.
We do not know i) how much GDP will grow next year, ii) whether supply chain issues will abate soon, or iii) if China and the U.S. will lower tensions. This economic and geopolitical uncertainty appears to be contributing to stock market volatility. Historically we have observed that usually when volatility increases by a large margin, stock markets head lower. In market terms, it has been a long while since we had such volatility.
Meanwhile equity markets are near record highs and record valuations. So, we continue to stay the course of risk balanced investing – take enough risk to reach your goals but not much more. We remain focused on striking the right aggressiveness versus defensiveness in client portfolios given the evolving uncertainty in the markets and the economy.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
[i] Morningstar: S&P 500 TR USD
[ii] https://www.msci.com/end-of-day-data-search
[iii] Finance.yahoo.com
[iv] Morningstar: Bloomberg US Agg Bond TR USD
[v] https://www.newyorkfed.org/research/policy/nowcast
[vi] https://www.economist.com/books-and-arts/2007/05/31/the-perils-of-prediction
[vii] Federalreserve.gov Transcript of Chair Powell’s Press Conference, September 22, 2021
[viii] https://www.nar.realtor/blogs/economists-outlook?page=1
[ix] https://twitter.com/Schuldensuehner/status/1445489330865115152/photo/1. Futures price.
[x] https://www.wsj.com/articles/germanys-christmas-king-gets-caught-up-in-shipping-chaos-11632475801
[xi] https://www.wsj.com/articles/the-world-relies-on-one-chip-maker-in-taiwan-leaving-everyone-vulnerable-11624075400
Container ship photo: Ian Taylor/Unsplash
Bottle photo: Bobby Donald/Unsplash
CIG Capital Advisors Market Update Video: September and Volatility
In September, the S&P 500 TR Index had its worst month since March 2020[i]. Will volatility continue to head higher?
Brian Lasher and Eric Pratt of CIG Asset Management give a quick posting on the markets.
Please click on the 3-minute market update video attached below.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
[i] Morningstar: S&P 500 TR USD
Exiting Your Practice? Important Issues to Consider
Providers exit their practices for a variety of reasons — dissatisfaction with the demands of running a business, the desire for a less strenuous work schedule, frustration with insurers, retirement. If you are thinking about exiting your practice, there are several steps you should take now that will help you maximize the purchase price and ensure a relatively smooth transaction.
Lay the Groundwork
Start by taking a critical look at your practice’s current financial condition. Identify areas of weakness. For example, does your practice experience poor collections or weak cash flow? How do your staffing levels compare to those of similar practices? Issues such as these can reduce the appeal of your practice. It’s to your benefit to deal with them well before you put your practice on the market.
You’ll want to have a realistic appraisal of your practice’s potential worth before you put it up for sale. Tangible assets, such as health care equipment, computers, and furniture, are relatively easy to value, though they generally make up only a small part of a health care practice’s total value. Goodwill is an intangible asset that can be difficult to value. But there are methods that can be used to establish a reasonable estimate. Some other widely used methods include the discounted cash flows and market multiples methods.
Identify Potential Buyers
You may receive an unsolicited offer. If you don’t, consider reaching out locally or contacting a broker who specializes in exiting health care practices. An experienced broker can identify and contact qualified potential buyers.
The speed with which a sale may occur will largely depend on the deal you’re seeking. Do you want a buy-out that will let you continue to practice as an employee? In that case, looking for a group practice, hospital, or other corporate buyer may be the best route. If the sale goes through to one of these entities, you will be able to continue to work in health care without the responsibilities of ownership.
If retirement is your goal, you may opt for a gradual buy-in by a provider who will take over your practice. Typically, this arrangement requires you to employ the prospective buyer and, under the terms of the deal, after a trial period of a year or two, offer a partnership with a documented exit arrangement for you. This arrangement could be in the form of a severance package.
Review All Offers Carefully
If you receive an offer, your focus should be on the would-be buyer’s financial condition and the payment terms if you plan on retiring. If you plan to continue working at the practice with the individual or entity who may buy it, you should carefully review all ramifications, including transfer expenses and malpractice terms involved in the sale.
Apart from satisfying yourself about the financial and legal issues involved in the sale, you should also feel that you will be able to fit into the potential buyer’s organization and that your advice and input will be welcomed.
Remember, whatever way your practice’s sale is structured, there will be tax implications. Let us help you secure the most tax-advantageous sale terms. Please contact us if you would like assistance.
The speed with which a sale may occur will largely depend on the deal you’re seeking.
We Can Help
To schedule a complimentary consultation with a CIG Capital Advisors professional, click here.
Dental tools photo: Succo/Pixabay
Stethoscope photo: Julio César Velásquez Mejía/Pixabay
CIG Capital Advisors Market Update: Risk Happens Fast
CIG’s inaugural 3-minute market update is attached. This soon-to-be regular conversation between Brian Lasher and Eric T. Pratt of CIG Asset Management focuses on an important aspect of the current stock market environment. If you have questions post viewing, please do not hesitate to contact your CIG wealth manager.
For more information on this 3-minute market update, please click here.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
CIG Asset Management Review: Risk Happens Fast
Summary:
* S&P 500 advances for seventh month in a row
* Strong corporate profits and the Fed’s not tapering yet
* A long time without a 5% pullback
Commentary:
The S&P 500 index rose for the seventh month in a row, gaining +3.0% in August[i]. Growth stocks continued July’s outperformance over value stocks with the Russell 1000 Growth Index up +3.7%[ii] while the Russell 1000 Value Index advanced +2.0%[iii] last month. Small-capitalization stocks as measured by the Russell 2000 Index gained +2.2%[iv]. Overseas, MSCI Emerging Markets led, rising +2.4% while developed stock markets, measured by MSCI EAFE net, gained +1.5%[v]. Chinese stocks, as represented by the SSE Composite Index, recovered a portion of July’s -5.4% drop, gaining +4.3% in August[vi].
On August 26, the U.S. Bureau of Economic Analysis (BEA) released its updated estimate for second quarter 2021 gross domestic product. The data in the report was encouraging, showing the economy grew at a +6.6% annual growth rate. Delving deeper into the report, second quarter growth in corporate profits was +9.2% which is even better than the +5.1% growth seen in the first quarter. Domestic corporate profits are now above their 2019 pre-pandemic peak.[vii] Historically, strong growth in profits leads to increased capital spending, wage increases and job creation.
Federal Reserve Chairman Jerome Powell spoke at the virtual Jackson Hole symposium on August 27. Investors were looking for a signal for when the Federal Reserve would begin tapering the purchase of at least $120 billion per month of bonds and they appeared to be encouraged by his comments, inferring that a taper was not imminent. Powell said, “We have much ground to cover to reach maximum employment,” and “The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.” Chairman Powell also added, “Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful,” and “We know that extended periods of unemployment can mean lasting harm to workers and to the productive capacity of the economy.” [viii]
Despite the encouraging growth and a dovish Federal Reserve, we started to suspect that it has been quite a while since we have seen even a minor pullback which is usually necessary for market “health.” Exploring the data, we found that such suspicions were correct as seen in the chart below.
We haven’t had a 5% drop in the S&P 500 since the above chart was published on August 16, 2021. The S&P 500 has now gone 210 trading days without a 5% pull-back.[ix] During the past 50 years, there have only been five longer streaks than the one we currently enjoy. During such streaks, investors can become complacent, but risk happens fast.
As seen in the table below, those five streaks all ended swiftly and out of the blue, with drawdowns, or losses, in the S&P 500 ranging from -7.0% to -9.2% and the NASDAQ -7.9% to -12.0%. Volmaggedon in early 2018 saw a spike in volatility that caused ETFs holding leveraged bets on calm markets to lose most of their value.[x] In 2015 China suddenly devalued its currency, the yuan.[xi] The Great Bond Massacre in 1994 was set into motion when Federal Reserve Chairman Alan Greenspan suddenly started to raise short term interest rates for the first time in five years.[xii] July 1996 marked the end of a 5½ year long bull market[xiii], and on July 7, 1986, after an extended Fourth of July weekend, Robert R. Prechter Jr. told his investment newsletter subscribers to “sell everything right away.”[xiv] Interestingly enough, even though Prechter’s 1986 call was short-lived, he nailed it on October 5,1987 when he told subscribers to get out just days before the October 19, 1987 crash.[xv]
Drawdown calculated using data from finance.yahoo.com
Another interesting statistic came to our attention for last month’s S&P 500 performance. The S&P 500 made 11 new intraday all-time highs in August 2021, tying the record set in 1929 – a year that did not turn out well. The next best August on record? August 1987 saw 10 intraday all-time highs.[xvi] As we recall, the October 1987 market crash was brutal.
The current bull market may continue, with the Federal Reserve delaying a taper in bond purchases but given its historic run we may be overdue for at least a small drawdown. Equity valuations are in the stratosphere. Current price to earnings ratio on the S&P 500 is 35.36, more than double the historical average of 15.95.[xvii] Current total U.S. market cap is 207.5% of U.S. GDP. At the peak of the dot com boom, this ratio was 142%.[xviii] How extreme are some valuations? On August 27, electric truck company Rivian filed for an IPO, seeking an $80 billion valuation. Elon Musk, whose investment in Tesla has made him the world’s second richest man with a net worth around $190 billion as of this writing[xix], commented on this news, tweeting on August 28, “I thought 1999 was peak insanity, but 2021 is 1000% more insane!” [xx]
During this period of record equity markets and record valuations we continue to stay the course of risk balanced investing – take enough risk to reach your goals but not much more. We continue to focus on striking the right aggressiveness versus defensiveness in client portfolios given the evolving positives and negatives in the markets and the economy.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
[i] Morningstar: S&P 500 TR USD
[ii] Morningstar: Russell 1000 Growth TR USD
[iii] Morningstar: Russell 1000 Value TR USD
[iv] Russell 2000 TR USD
[v] https://www.msci.com/end-of-day-data-search
[vi] finance.yahoo.com
[vii] https://fred.stlouisfed.org/series/A053RC1Q027SBEA
[viii] https://www.cnbc.com/2021/08/27/powell-sees-taper-by-the-end-of-the-year-but-says-theres-much-ground-to-cover-before-rate-hikes.html
[ix] Data from finance.yahoo.com
[x] https://www.cfainstitute.org/en/research/financial-analysts-journal/2021/volmageddon-failure-short-volatility-products
[xi] https://www.investopedia.com/trading/chinese-devaluation-yuan/
[xii] https://fortune.com/2013/02/03/the-great-bond-massacre-fortune-1994/
[xiii] https://www.latimes.com/archives/la-xpm-1996-07-16-mn-24708-story.html
[xiv] https://www.washingtonpost.com/archive/business/1989/04/23/where-have-all-the-gurus-gone/853f8ead-ae7a-4364-8315-0bc0439e01dc/
[xv] https://www.nytimes.com/2007/10/13/business/13speculate.html
[xvi] Carter Braxton Worth, August 27, 2021 @CarterBWorth
[xvii] https://www.multpl.com/s-p-500-pe-ratio
[xviii] https://www.gurufocus.com/stock-market-valuations.php
[xix] https://www.forbes.com/real-time-billionaires/#471cc9893d78
[xx] https://twitter.com/elonmusk/status/1431499453618327554
Rollercoaster photo: Incygneia/Pixabay
Light effects photo: Ryan Stone/Unsplash
CIG Asset Management Review: Above Trend but for How Long?
Summary:
* Diverse stock market returns in July
* Watch FRONTLINE’s “The Power of the Fed”
* Is the market in a bubble?
Commentary:
Returns within stock markets varied during the month of July. The S&P 500 index rose +2.4%.[i] The Russell 1000 Growth Index was up +3.3%[ii] while the Russell 1000 Value Index only gained +0.8%.[iii] Small-capitalization stocks as measured by the Russell 2000 Index lost -7.0%.[iv] Overseas, developed stock markets as measured by MSCI EAFE net, gained a modest +0.7%.[v] Chinese stocks, as represented by the SSE Composite Index, fell -5.4%[vi] as China tightened regulatory policies over technology companies. MSCI Emerging Markets, which has a third of its weighting in China and exposure to under-vaccinated emerging countries, lost -7.0%.[vii]
As a follow-up to last month’s Asset Management Review, we encourage you to watch the recent FRONTLINE investigative episode called “The Power of the Fed.”[viii] While we do not agree with everything that the journalist and the interviewees say, this award-winning, long-form investigative journalism show does highlight how the Federal Reserve’s excessive money printing may lead to asset bubbles and exacerbate wealth inequality, which we believe could be damaging to the long-term health of the economy and the capital markets.
Given our belief that the market has become increasingly more fragile, which we talked about last month, we believe that investors may see single digit returns on a year-to-date basis in the short term before they see a return to the current mid-teens year-to-date return in the S&P 500 Index. The VIX, the measure of equity market volatility, in our opinion seems to be a coiled spring that continues to be tightened further and further. Right now, it seems like nothing bothers this market for long, e.g., Dr. Fauci worried about more deadly variants than Delta; computer chip shortages; or housing/ auto/ gas inflation. We expect more volatility later in the year.
The chart below does concern us. As you can see, there is significant cyclicality to the S&P Composite when it is adjusted for inflation. “Over earning” in the stock market for many years often leads to underperformance and losses over long periods. We have written in the past about how anecdotally and qualitatively 2021 reminds us of 2000. Quantitatively, the market’s 175% above trendline performance dramatically tops the 122% in 2000 and the 79% in 1929.[ix] Historically, markets have reverted to the red long-term trend line. Will this time be different than the large market drawdowns subsequent to the 1901, 1929, 1966 or 2000 peaks?
Source: Advisor Perspectives
It is quite possible that we are in an asset bubble right now. It is hard to know for sure when you are in it. The only sure-fire way to know if there is a market bubble is after it pops. We agree with John Hussman, who recently wrote in The Folly of Ruling Out a Collapse, “The problem with a speculative bubble is that you can’t make the short-term outcomes better without making the long-term outcomes worse, and you can’t make the long-term outcomes better without making the short-term outcomes worse. Now it’s just an unfortunate situation.”[x]
Our approach to this possible market bubble? Stay the course of risk balanced investing – take enough risk to reach your goals but not much more. We continue to focus on striking the right aggressiveness versus defensiveness in client portfolios given the positives and negatives in the markets and the economy.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
[i] Morningstar: S&P 500 TR USD
[ii] Morningstar: Russell 1000 Growth TR USD
[iii] Morningstar: Russell 1000 Value TR USD
[iv] Morningstar: Russell 2000 TR USD
[v] https://www.msci.com/end-of-day-data-search
[vi] finance.yahoo.com
[vii] https://www.msci.com/end-of-day-data-search
[viii] https://www.pbs.org/wgbh/frontline/film/the-power-of-the-fed/
[ix] https://www.advisorperspectives.com/dshort/updates/2021/08/04/regression-to-trend-another-look-at-long-term-market-performance
[x] Hussmanfunds.com
Tightrope photo: Dmitry Kovalchuk/iStock
Bubble photo: Mathieu Turle/Unsplash
Maximize Revenues and Trim Expenses by Streamlining Practice Operations
Improving operational efficiencies should be an ongoing process for all medical practices. Reevaluating and examining existing procedures can help identify areas of weakness that can drain revenues and increase costs, lowering the bottom line. The following suggestions may help jump-start your own thoughts about ways you can maximize your practice’s revenue stream and reduce costs without sacrificing patient care.
Keep Coding Current
Miscoding is expensive: It can reduce reimbursements and cause delays or denied claims. Miscodes are often due to old data, under coding to avoid penalty risk, or leaving coding decisions to inexperienced support staff.
For more accurate coding, maintain updated coding manuals and software, keep a code reference summary handy in exam rooms, and use online coding resources. If you make notes during each patient visit, you’ll be able to bill more accurately. Taking coding refresher courses will help your staff stay current with coding practices.
Finally, periodic assessments of your practice’s coding accuracy can help uncover problem areas. These assessments could include a review of your practice’s forms and a comparison of billing codes with the actual services that were provided.
Improve Employee Productivity
Consider these ideas for improving productivity:
-
-
- Set productivity goals and offer incentives to your staff for reaching those goals
- Delegate administrative functions (ensure that physicians spend most of their day doing only what physicians can do)
- Plan patient flow so that physician and medical assistant billable time is maximized
-
Exercise More Efficient Control over Staff Time
It is often possible to trim overtime expenses without reducing the quality of patient care. Start by reviewing the payroll records of your non-exempt employees to determine who worked overtime and why. Find out if your practice was fully staffed and simply busy or if it was short one or more employees on the days when the overtime occurred. If overtime was necessary because you were short-staffed, see if this was due to vacations or some other controllable situation. It may be time to revise your practice’s policy on vacation time if scheduled time off was the cause of the jump in overtime.
Update Fee Schedules
Patients can be price conscious and resistant to fee increases. Nevertheless, if your practice hasn’t raised fees in some time, you may want to consider appropriate increases. In addition, you should periodically examine the reimbursement rates of all the plans you participate with and reevaluate whether it makes economic sense to continue accepting patients from some of the ones that reimburse poorly.
Improve Your Purchasing Practices
Medical and office supplies can be a significant part of a practice’s expenses. Busy practices may take the path of least resistance and continue ordering from the vendors that have always supplied them. That can be an expensive mistake. Choose several of your practice’s “high-volume” items and find out how much other vendors are charging. Use that information to negotiate lower prices with your current suppliers, consolidate orders with fewer vendors, or switch to new suppliers to save money.
We Can Help
We can help you identify areas where streamlining operations may help optimize your practice’s bottom line. Please call.
. . . if your practice hasn’t raised fees in some time, you may want to consider appropriate increases.
To schedule a complimentary consultation with a CIG Capital Advisors professional, click here.
Photo: Daniel Sone/Unsplash
CIG Asset Management Review: Inflation and Fragility
Summary:
* The Federal Reserve struck a more hawkish tone mid-month
* U.S. stocks rebound after a dip
* Markets appear increasingly fragile
Commentary:
Markets were stunned on June 16th as the Federal Reserve struck a more hawkish tone. Federal Reserve committee member’s projections now pointed to two interest-rate hikes in 2023 versus none before. The U.S. dollar jumped higher on the news, while many commodities reversed course from the prior month as inflation-focused investments suffered. Although the S&P 500 Index initially fell -1.6%, it fully recovered within days to end the month of June up +2.3%.[i] Overseas stock markets lost money during the same period with the MSCI EAFE net down -1.3% and the MSCI Emerging Markets losing -0.1% given U.S. dollar strength.[ii]
During the month, we reflected on the increasing criticism of the Federal Reserve by market commentators like Mohamed El-Erian, president of Queens’ College, Cambridge University, and adviser to Allianz. He believes the Federal Reserve is ignoring so-called transitory inflation at its own peril. In a June 30 Financial Times op-ed[iii], he referenced a Bank of America survey that suggests the markets are currently driven by a consensus around “durable high global growth, transitory inflation, and ever-friendly central banks.”[iv] El-Erian argues that possibility of unanticipated non-transitory inflation could upset this happy market consensus leading to significant economic and financial damage.
El-Erian has been very right in the past in our opinion. In a CNBC interview on February 3, 2020, he warned about the risks of the newly discovered COVID-19 virus. “It is big. It’s going to paralyze China. It’s going to cascade throughout the global economy. We should pay more attention to this. And we should try and resist our inclination to buy the dip”, said El-Erian.[v] The S&P 500 reached its then all-time high two weeks after that interview and then fell -35% until it reached the March 23, 2020 low.[vi]
More recently, on February 16, 2021, El-Erian warned in a CNN interview, “Investors are chasing what someone labeled the ‘rational bubble’. While they are fully aware asset prices are high, they expect prices could go even higher thanks to massive central bank liquidity and prospects of fiscal injections. Basically, investors feel confident riding what is a massive historical liquidity wave.”[vii] So far, investors have not heeded El-Erian’s warning. Indeed, as of July 9, 2021, the S&P 500 has rallied +11% from the CNN interview.[viii] The massive historical liquidity wave that El-Erian warned about in February 2021 continues to grow. Federal Reserve asset purchases shown in the green shaded area in the chart below has dramatically increased the discomfort of holding cash with 0% yield and amplified the desirability of buying risky stocks which investors expect offer higher returns.
data from https://fred.stlouisfed.org and finance.yahoo.com
Constant intervention by the Federal Reserve and other central banks since 2009 have led to an environment of self-reinforcing speculation and a rising S&P 500 index shown in the black line. Reckless fiscal policy since 2017 has only augmented the atmosphere. In our opinion, entire investment strategies have now been built around the perceived certainty of Federal Reserve and central bank support. Retail traders’ share of stock market volume has surged since the lockdowns, and the number of individuals opening brokerage accounts is at a record pace in 2021[ix]. We believe that most bubbles end when the last marginal investor is fully invested.
The belief that central bank liquidity has the capacity to support elevated markets indefinitely creates a reflexive response by the market as more and more investors jump on the bandwagon. Thus, the market becomes increasingly fragile. Consequently, a more aggressive Federal Reserve intervention is required with each market downturn which one can see in the chart above. El-Erian’s op-ed hints at the dynamics of certainty and fragility. Now markets move downward based on the Fed pretending to inch a teensy bit toward maybe raising rates over 18 to 30 months from now[x].
No matter what real world inflation we might be experiencing currently, debating the transitory nature of inflation is likely to continue to produce periodic setbacks for inflation-focused investments. Inflation expectations are changing, and it will take time for the debate to be settled in some fashion. Until these expectations are cemented in an alternative vision of the world by investors, market commentators and powerful institutions, we might expect the market to move in short order from calm to quite volatile.
For CIG’s clients, we will continue to take a risk balanced approach to this historically expensive market in these uncertain and fragile times. Risk balancing means moderating portfolios’ exposure to the consensus views of other investors as well as using hedging strategies like owning publicly traded hedge funds, gold, and volatility strategies.
Understanding and paying attention to this environment is important to achieving your financial planning goals.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
[i] Morningstar: S&P 500 TR USD
[ii] https://www.msci.com/end-of-day-data-search
[iii] https://www.ft.com/content/77ed35a0-cf91-4c7e-b779-a57ecc6b1045
[iv] Ibid.
[v] CNBC.com February 3, 2020
[vi] Calculated using data from finance.yahoo.com
[vii] CNN.com February 16, 2021
[viii] Calculated using data from finance.yahoo.com for the period February 16 to July 9, 2021
[ix] https://www.palmvalleycapital.com/fundletter
[x] See so-called dot plots comparing March and June targets in this article: https://cnb.cx/2TygcxY
Eccles Federal Reserve Board Building photo: APK/CC BY-SA 3.0
Wave photo: Jeremy Bishop/Unsplash
CIG Asset Management Review: The Return of Active Portfolio Management
Summary:
* S&P 500 Index posted its fourth consecutive month of gains
* Active portfolio management beat the index
* 2Q 2021 portfolio rebalancing activity
Commentary:
The S&P 500 Index[i] posted its fourth consecutive month of gains, up +0.7% in May. International markets performed better than the U.S. with the MSCI EAFE net up +2.9% and the MSCI Emerging Markets gaining +2.1% given continued U.S. dollar weakness[ii]. The Bloomberg Commodity Index[iii] returned +2.7% led by Gold, +7.7% and Crude Oil, +4.3%.[iv] Year-to-date, The Bloomberg Commodity Index has increased 18.9%.
As we talked about in our 2021 Outlook, since the 2008-2009 Great Financial Crisis, many passive index investors have been conditioned to buy short-term market pullbacks and have been rewarded as markets have continued to move to all-time highs. In our view, stocks, especially in the United States, continue to be expensive from a valuation standpoint. The Buffet Indicator, the ratio of the total market capitalization of U.S. equities to Gross Domestic Product, was 199.3% at the end of May. As we have discussed previously, to put this in perspective, at the peak of the dot-com bubble in March 2000, this ratio reached 142.9%.[v]
The month of May saw a return to active portfolio management. According to Bank of America U.S. Equity Strategist Ohsung Kwon, 70% of active managers beat the Russell 1000 Index in May, making it the best May in 30 years.[vi] We continue to believe that active management will benefit clients as we continue through uncharted economic and market territory, as we have discussed in our recent CIG Asset Management Reviews “Sir Isaac, Groucho, and the Gods” and “Do you have enough time? Why is this time different?“
Many large cap technology names such as Apple (-6.6% return) and Amazon (-7% return)[vii] were down for the month. The weighting of these two names, Apple 5.7% and Amazon 4.0%, dominate the S&P 500 index.[viii] Last month, Apple and Amazon were a large drag on performance of the S&P 500. Given lawsuits and other company-specific issues, we should not discount the possibility that further losses in these two companies could continue to negatively impact the S&P 500.
Generally, May featured several ups and downs in the U.S. stock market. In our opinion, broad market optimism was tempered by inflation concerns. In our minds, the recently released May Consumer Price Index[ix] confirms rising inflation. But as we recently explained in MarketWatch, lesser-heralded indicators like the Producer Price Index are flashing even more urgent warning signs that impending price increases may be still higher, and are more deeply embedded in the economy than the CPI would suggest. We may experience more volatile months like May, as market participants continue to debate whether inflation is transitory or not and how the Federal Reserve will react.
Given our views, we have continued to add to investments which may outperform if inflation is not transitory. We are in the process of rebalancing CIG managed client portfolios. We are decreasing our exposure to technology, adding an actively managed emerging market fund, adding an industrial holding that is focused on aerospace and defense, adding to our energy pipeline holding, reallocating a portion of our gold holdings into an actively managed mining fund and adding a volatility position that may benefit if market volatility perks up.
We continue to take a risk balanced approach to this historically expensive market in these uncertain times. We are not sitting still.
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
[i] Morningstar: S&P 500 TR USD
[ii] https://www.msci.com/end-of-day-data-search
[iii] Bloomberg.com
[iv] Data from finance.yahoo.com
[v] Gurufocus.com
[vi] Financial Times, June 8, 2021
[vii] Calculated from data from finance.yahoo.com
[viii] https://www.slickcharts.com/sp500 as of 6/15/2021
[ix] https://www.bls.gov/news.release/pdf/cpi.pdf
Stock charts photo: Nicholas Cappello/Unsplash
Advisor photo: cottonbro/Pexels
CIG Asset Management Review: Sir Isaac, Groucho, and the Gods
Summary:
* S&P 500 Index posted its third consecutive month of gains
* Financial market history books might offer lessons
* Understanding human behavior may be the most important requirement right now
- Commentary:
-
April featured a macro environment that tilted positive. The market reacted favorably to i) the Federal Reserve continuing to increase its balance sheet (greater than $1.2t over the last year), ii) a rebound in U.S. durable-goods orders, and iii) a record 21.1% increase in U.S. household income in March[i].
We noted that the service PMI index of prices increased to 61% in April (manufacturing PMI also continues to suggest a greater inflation risk) and the COVID resurgence pushed the Eurozone into a double-dip recession[ii]. These potential risks seemed far from investor’s minds.
Accordingly, the S&P 500 Index[iii] posted its third consecutive month of gains, up 5.3% in April. International markets did quite well with the MSCI EAFE net up 2.7% and the MSCI Emerging Markets gaining 2.4% given U.S. dollar weakness[iv]. U.S. Treasury Bonds had a good month after a significant selloff in March while the Bloomberg Barclays High Yield Bond index[v] returned 1.1%. Higher inflation expectations were supported by an 8.3% increase in the Bloomberg Commodity Index[vi] and a 7.4% increase in crude oil[vii] during the month.
Recently, we have been reflecting on what the end game for financial markets might look like after reading noted economist Mohamed El-Erian’s May 3rd opinion piece in the Financial Times entitled “Fed framework holds central bank hostage[viii].” We have been digging out our financial market history books to examine previous bubbles and manias and inflationary episodes to see what lessons they might offer for our immediate future and beyond. Of course, we cannot divine the timing of any eventual market shift. We recall Sir Isaac Newton’s famous quote in 1720 after initially making money in the South Sea Bubble, re-entering the scam, and then losing multiples more of his profit: “I can calculate the motions of the heavenly bodies, but not the madness of people[ix].”
We have often mentioned in these updates how today reminds us of the Internet Bubble of 2000 and what we read from past bubbles echoes our experience then and what we are seeing today. What is a bubble? Nobel Laureate Franco Modigliani offered an insightful definition: “The expectation of growth produces growth, which confirms the expectation; people will buy it because it went up. But once you are convinced that it is not growing anymore, nobody wants to hold a stock because it is overvalued. Everybody wants to get out and it collapses, beyond the fundamentals[x].”
Last year’s unprecedented market recovery which we talked about in the March Blog, this year’s GameStop democratization of the markets and cryptocurrencies’ ascendence, all seem familiar. In Charles Mackay’s “Extraordinary Popular Delusions and the Madness of Crowds”, first published in 1841, he recounts, “Many individuals suddenly became rich. A golden bait hung temptingly out before the people, and, one after the other, they rushed to the tulip marts, like flies around a honey-pot. Everyone imagined that the passion for tulips would last forever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them. The riches of Europe would be concentrated on the shores of the Zuyder Zee, and poverty banished from the favoured clime of Holland. Nobles, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney sweeps and old clotheswomen, dabbled in tulips. People of all grades converted their property into cash and invested it in flowers.[xi]”
Like the recently announced second NBA-star-sponsored Shaq SPAC[xii], the 1920s stock market attracted the celebrities and “social media influencers” of that age including Groucho Marx, who borrowed over a quarter of a million dollars to play the stock market. He wrote in his memoirs, during that bull market there was no need to employ a financial advisor, “You could close your eyes, stick your finger any place on the big board and the stock you bought would start rising[xiii].” Marx along with Irving Berlin and Eddie Cantor of Ziegfield Follies fame speculated heavily and eventually lost fortunes[xiv]. (We will see how Elon Musk does with his cryptocurrency holdings.)
Understanding human behavior may be the most important requirement right now and we have also looked to classic literature to understand the narratives that we tell ourselves at this point in the market cycle. It is easy to take these narratives and what you are being told by CNBC into your heart and act against your best interest. We reflect on the narrative, known as Nihonjinron, that the Japanese told themselves during their bubble of the 1980s – that Japan is unique and better[xv]. But such hubris is often a precursor to bubbles.
Shakespeare’s observation about fortune seems truer that “she is turning and inconstant . . . the poet makes a most excellent description of it.[xvi] Exceptionalism is usually fleeting. To that end, we offer Rudyard Kipling’s poem, “The Gods of the Copybook Headings[xvii]” written post the 1918 pandemic and just prior to the 1920s bubble discussing the constancy of the human condition. The last two stanzas are chilling in reflecting on today’s market. We continue to pursue a risk balanced approach to the market – not fight the Federal Reserve or run for the hills; be in the game – it could last a long time; and maintain the appropriate emotional distance. We endeavor to not be the “bandaged finger [that] goes wabbling back to the Fire.”
This report was prepared by CIG Asset Management and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
[i] Macro data is from Evercore ISI’s Weekly Economic Summary 5/2/21.
[ii] Macro data is from Evercore ISI’s Weekly Economic Summary 5/2/21.
[iii] Morningstar: S&P 500 TR USD
[iv] https://www.msci.com/end-of-day-data-search
[v] Morningstar: BBgBarc High Yield Corporate TR USD
[vi] www.Bloomberg.com
[vii] www.finance.yahoo.com
[viii] https://www.ft.com/content/d4b53d27-59b8-4b16-b59b-ef2fe4c0289e
[ix] Kindleberger, Charles P., Manias, Panics, and Crashes – A History of
Financial Crises. Revised ed., Basic Books, 1989, page 38. An excellent
textbook which is required reading at most business schools.
[xi] Mackay, Charles, Extraordinary Popular Delusions and the Madness of Crowds.
Harriman Definitive ed., Harriman House LTD, 2018, page 79.
[xii] https://finance.yahoo.com/news/shaq-spac-2-0-coming-133637566.html
[xiii] Chandler, Edward. Devil Take the Hindmost – A History of Financial Speculation.
Plume Books, 2000, page 207. A more narrative focused account of speculation
from Rome to the Japanese bubble economy.
[xiv] Ibid. p. 203.
[xv] Ibid. p. 283.
[xvi] Shakespeare, William. Henry V. Library of Alexander, 1956, Act III, Sc. 6.
[xvii] First published in the Sunday Pictorial (London) October 26, 1919, and – as “The
Gods of the Copybook Margins” – in Harper’s Magazine in January 1920. It
has also been called “Maxims of the Market Place”. ‘Copybook
headings’ were proverbs or maxims printed at the top of 19th century British
schoolboys’ copybook pages. http://www.kiplingsociety.co.uk/poems_copybook.htm